Dollar General 2013 Annual Report Download - page 124

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management
We are exposed to market risk primarily from adverse changes in interest rates, and to a lesser
degree commodity prices. To minimize this risk, we may periodically use financial instruments, including
derivatives. All derivative financial instrument transactions must be authorized and executed pursuant
to approval by the Board of Directors. As a matter of policy, we do not buy or sell financial
instruments for speculative or trading purposes, and any such derivative financial instruments are
intended to be used to reduce risk by hedging an underlying economic exposure. Because of high
correlation between the derivative financial instrument and the underlying exposure being hedged,
fluctuations in the value of the financial instruments are generally offset by reciprocal changes in the
value of the underlying economic exposure.
Interest Rate Risk
We manage our interest rate risk through the strategic use of fixed and variable interest rate debt
and, from time to time, derivative financial instruments. Our principal interest rate exposure relates to
outstanding amounts under our unsecured debt Facilities. As of January 31, 2014, we had variable rate
borrowings of $1.0 billion under our Term Facility and no borrowings outstanding under our Revolving
Facility. In order to mitigate a portion of the variable rate interest exposure under the Facilities, we
have entered into various interest rate swaps in recent years. For a detailed discussion of our Facilities,
see Note 5 to the consolidated financial statements.
Currently, we are counterparty to certain interest rate swaps with a total notional amount of
$875.0 million entered into in May 2012 in order to mitigate a portion of the variable rate interest
exposure under the Facilities. These swaps are scheduled to mature in May 2015. Under the terms of
these agreements we swapped one month LIBOR rates for fixed interest rates, resulting in the payment
of an all-in fixed rate of 1.86% on a notional amount of $875.0 million. Such all-in rate was reduced in
2013 due to a reduction in the underlying applicable margin on our Term Facility as a result of the
refinancing of outstanding indebtedness as discussed in Note 5 to the consolidated financial statements.
A change in interest rates on variable rate debt impacts our pre-tax earnings and cash flows;
whereas a change in interest rates on fixed rate debt impacts the economic fair value of debt but not
our pre-tax earnings and cash flows. Our interest rate swaps qualify for hedge accounting as cash flow
hedges. Therefore, changes in market fluctuations related to the effective portion of these cash flow
hedges do not impact our pre-tax earnings until the accrued interest is recognized on the derivatives
and the associated hedged debt. Based on our variable rate borrowing levels and interest rate swaps
outstanding as of January 31, 2014 and February 1, 2013, respectively, the annualized effect of a one
percentage point increase in variable interest rates would have resulted in a pretax reduction of our
earnings and cash flows of approximately $1.4 million in 2013 and $13.9 million in 2012.
To mitigate our interest rate risk on our planned issuance of 10-year senior notes, we entered into
six treasury locks that were designated as cash flow hedges during the period from March 20, 2013 to
March 27, 2013. Such instruments had a combined notional amount of $700.0 million and a weighted-
average 10-year U.S. Treasury rate of 1.94%. The issuance of the 2023 Senior Notes occurred on
April 11, 2013, and the related settlement of the treasury locks resulted in a loss of $13.2 million that
was deferred to Other comprehensive income. For more information, see Note 5 to the consolidated
financial statements.
Market conditions and periodic uncertainties in the global credit markets may increase the credit
risk of counterparties to our swap agreements. In the event such counterparties fail to perform under
our swap agreements and we are unable to enter into new swap agreements on terms favorable to us,
our ability to effectively manage our interest rate risk may be materially impaired. We attempt to
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10-K